Chapter 3A: Hospital Conversion Processes

Rural Hospital Flexibility Program Tracking Project

Chapter 3A
Hospital Conversion Processes

Walter R. Gregg, M.A., M.P.H., and Ira Moscovice, Ph.D.
University of Minnesota

Introduction

Rural hospitals continue to play a major role in providing health care services to the nation's 54 million rural residents. However, over the last few decades hundreds of these hospitals have been forced to close their doors. The continued struggle of rural hospitals to meet local health care needs has a multitude of causes, including technological, demographic, economic and policy changes, as well as decreasing capital reserves, aging physical plants, and rising numbers of the uninsured and underinsured. Small hospitals are at particular risk because of their heavy dependence on Medicare reimbursement to cover operating costs.

This chapter provides observations about the conversion experiences of hospitals participating in the Flex Program. Data for the chapter were drawn from the telephone survey of 217 CAH administrators, the sixteen CAH site visits conducted during the second year of our project and information collected by the University of North Carolina (UNC) on hospital characteristics and participation in the Flex Program. Observations of the first two years of the Flex Program suggest that the hospital conversion and network development experiences of program participants have accelerated due to pressures such as aging physical plants, lack of capital, and lagging technological infrastructure. It is as if CAH conversions have been influenced by a compelling need to "do it now" and "do it quick" to avert closure.

It is natural and tempting to search for program impact as soon as conversions occur. However, given the market and industry conditions that have faced the rural areas represented, care should be exercised in drawing conclusions at this early stage.

Hospital Conversion Experiences

Reasons for Conversion

The CAH administrator survey asked respondents to identify up to two of the most important reasons for conversion (Figure 1). In some ways this question measures key threats facing the administrators prior to conversion. The open-ended responses were grouped into broad conceptual categories for analysis. Over one-half of the administrators identified financial distress or some action needed to avoid or forestall closure (52% payment and 6% survival-related). About a third of the administrators reported the primary motivation for conversion involved program-related or strategic issues, and the remainder cited community issues, state/federal health policy and regulations.

Figure 1. Reasons for Conversion to a Critical Access Hospital (n=364*)

* Administrators could provide up to two reasons

Payment Related: By far the vast majority of administrators cited concerns about finances, reimbursement and their hospital's bottom line as the most significant reason for conversion. The strong attention given to the financial need of these facilities is not surprising given the crisis mode under which many have been operating for years. However, several CAH administrators cautioned that it was critical to keep the financial crisis in perspective. If the financial crisis is the only focus, it can prevent administrators from recognizing other issues that underlie the larger financial problems. In other words, financial viability should be addressed from a balanced perspective that focuses on those factors that have contributed to the crisis, as well as those that may be projected to emerge as rural hospital markets continue to evolve. If a balanced approach is not adopted, the long-term survival of the hospital becomes problematic.

There were also administrators who reported that the development and organization of new services was often a struggle requiring them to juggle the need for fiscal viability with the desire to meet community needs. Several noted that cost-based reimbursement under the Flex Program opened up additional options (i.e., developing new services that are needed, or serving primarily Medicare recipients). A number of administrators pointed out that private sector management styles provided important lessons for operating their public sector facility. If they could not find effective strategies for stabilizing their financial viability it would become increasingly difficult, if not impossible, to address community health care needs.

Program Related: Twenty-one percent of those surveyed listed program-related reasons as a key factor in the conversion of their hospital. For some, this response illustrated the ease of transition because they already fit the bill - "Didn't need to change a thing - We fit the model and already saw ourselves as predominantly a primary care provider - It was a good fit for the community." Others pointed to the regulatory flexibility that came with designation such as the flexibility in supervision and staffing. This was one of the key program-related reasons reported by CAHs located in frontier counties.

The majority of administrators reported that few hospital operations and organizational relationships had changed solely because of participation in the Flex Program. However, many of the administrators who originally felt the program had not contributed to the changes their hospital had experienced since conversion later commented that those changes would not have been possible without the added resources and flexibility provided through program participation (i.e., the changes would have occurred much later or perhaps not at all).

Strategic Related: Almost ten percent of the surveyed administrators identified strategic-related reasons for their hospital's conversion. Considering the overwhelming importance of finances and program fit, this would seem to indicate the intent of some administrators to use the CAH conversion as an opportunity for proactive planning.

Some respondents reported that the conversion of their hospital was the result of an existing strategic plan - "We decided (to convert) during our strategic retreat," while others described less elaborate efforts that closely approximated the creation of a business plan. For one administrator the most important part of business plan development was the ongoing debate among the management team about the way the hospital should operate following conversion. He felt that it was critical to get expectations and assumptions out in the open and to discuss their merits relative to what could be expected of the CAH model. This provided a venue for identifying and avoiding market mistakes. For his hospital's conversion decision the final criterion was "if it doesn't make good business sense when you're not a CAH, it doesn't make good sense when you are one." He highly recommended use of this strategy by all CAH administrators. For these 10 percent, we begin to see the act of conversion as an enabling strategy rather than a reactionary strategy. Conversion is being used to position organizations for the next steps in a broader strategy to meet both existing and emerging market requirements, rather than as an end point for maintaining the status quo. In site visits, we heard many examples of actions to maintain the status quo, which is more familiar and comfortable than innovation, as well as appealing to the risk-averse.

Community Related: Only seven percent of the administrators in the survey identified community-related reasons for conversion. This is not surprising given the strong financial motivations for CAH conversion and the opportunity to list only two reasons as a rationale for conversion. Some spoke of reasons that were somewhat altruistic but also related to their survival, such as "keep health care in the community," while others focused more on the ethical and strategic aspects of community such as the "…community desires and deserves a strong array of services." Whether altruistic, strategic, or just sentimental, these and other comments clearly underscore the extent to which some of these hospitals are embedded in their local communities and are a part of the community's economic and social life.

Policy and Regulations: Surprisingly, few administrators identified existing or emerging rural health policy and regulations as one of their chief reasons for conversion to a CAH. It is possible that this finding reflects the historical trend that has been developing since the Balanced Budget Act (BBA) of 1997 was first passed (i.e., rescinding key financial provisions that adversely affected rural hospitals). It is also possible that much of the concern about the reimbursement and regulatory constraints spelled out in the BBA and retained in subsequent law was captured with statements about financial reasons for conversion.

Lessons Learned

Hospitals, states, and stakeholders participating in the Flex Program have reported a number of lessons learned that they felt should be shared through the Tracking Project. The information and recommendations they provided were consistent with the Year 01 findings. Nine key lessons have been sorted into three areas: 1) the strategic frame of conversion to CAH; 2) conversion support for success; and 3) conversion trip points.

(1) Strategic Frame

It is still too soon to be sure what aspects of hospital characteristics or program relationships may have the most influence on making successful conversions and, more importantly, maintaining successful operations after conversion. The key theme for the four lessons below is that a hospital administrator runs a risk of failure if it is assumed that any single provision of the program is sufficient to stave off closure. Success depends upon the ability of managers to engage in ongoing efforts to assess, evaluate and integrate their efforts within a context that accommodates the immediate needs of their facility relative to existing market conditions, and also considers the potential implication of such actions for other key players in their market area.

Cost-based reimbursement should not be the only reason to convert.
Don't wait to convert; if you are sure of the facts - act on them.
Find out what other hospitals have experienced in their conversion process.
Working with the community can be difficult but is important for a successful conversion.

(a) Cost-Based Reimbursement

The fact that most of the hospitals participating in the Flex Program are in poor fiscal condition is probably the single most important factor behind respondent reports that financial need was a key reason to convert. Three-quarters of the 164 administrators providing pre-conversion annual income figures in the survey reported losses (averaging $200,000). However, many administrators recognized the danger of placing too much emphasis on reimbursement in the conversion decision.
CAH reimbursement under Medicare pays only "allowable costs" and obviously pays only for Medicare patients. A few survey respondents and administrators interviewed during the site visits related instances where colleagues had used financial opportunities (not necessarily Flex Program opportunities) to make-up for cash shortfalls rather than using them to position their facility in a more adaptive and flexible operational mode. The former strategy postpones the inevitable by focusing on maintaining the status quo while the latter enables the organization to better adapt to changing market demands by underwriting structural and operational change.
(b) Don't Wait to Convert - If You Are Sure of the Facts, Act on Them
Change is hard to embrace for most individuals and it is even more difficult for organizations because of the variety of interest groups and stakeholders involved. Given the poor financial position of many hospitals considering conversion to a CAH, it is possible to wait too long to make the conversion decision. A number of respondents emphasized the importance of acting prudently but promptly in the decision to convert. They recognized that good information was the key to making timely and effective decisions about organizational change, and emphasized the importance of good management and leadership.
While some participating hospitals have expanded existing services and added new ones, the larger facilities that are now becoming CAHs will face more difficult choices. Participation in the CAH program may require these hospitals to reduce the size of their operations significantly (such as reducing inpatient capacity while increasing ambulatory capacity, or retraining and replacing staff resources). Administrators facing more significant operational changes may postpone conversion either because of the desire to re-analyze the data or because the decision is difficult or painful. Administrators who have faced such decisions have discussed the agonizing process of reducing their workforce (e.g., meeting "downsized" individuals or their relatives in the local park, bank, or grocery store). The smaller the community, the more difficult the human aspect can become. But this does not change the fact that if action is not taken, the hospital could lose its role as an employer altogether.
It is also not surprising that some administrators delay conversion decisions because they have hopes that their hospital will be saved by a last minute state legislative appropriation or low/no-interest loan (stories of such rescues have persisted since the Essential Access Community Hospital/Rural Primary Care Hospital [EACH/RPCH] Program and, to a degree, continue today).
Administrators who have made the decision to convert recommend that conversion be scheduled for the beginning of the month. This is similar to a recommendation last year that conversion be scheduled for the end of the hospital's fiscal year to make it less expensive (i.e., avoiding multiple audits) and easier on the people involved. It is also advantageous, if feasible, not to be the first in the state to convert. Unfortunately, those hospitals seeking to convert are often in the worst financial condition. Those fortunate enough to become affiliated with network providers with a strong commitment to their partners and access to sufficient resources are able to negotiate the transition with far greater aplomb, and are better prepared to begin successful post-conversion operations. For example, a CAH that has a strong collaborative relationship with a larger hospital has better opportunities for obtaining bridge loans from local lenders or from the support hospital.
(c) Find Out What Other Hospitals Have Experienced
A number of respondents strongly recommended consultations with administrators who have already gone through the process. "Networking with CAHs can be very helpful in sorting out issues." However, it is important to remember that each hospital's circumstances will be different and therefore subject to varying degrees of influence from community, physicians, nurses, state level staff, and others.
One respondent made the important observation that it is more helpful to get advice from hospitals that converted later in a state program's history than earlier, when the learning curve was steeper. In other words, it helps to find out how things should work in order to foster similar conditions for your own hospital's conversion.
(d) Working with Communities Can Be Difficult, but It's Important
As with the information collected last year regarding the pros and cons of involving community representatives in the conversion process, there was a range of opinion among the respondents. Many pointed out that it was critical to obtain the needed support of the community. When looking at the choice of words used by administrators regarding the community, "community involvement" often was seen as a process of community members educating rather than sharing decision-making authority or inviting outside expertise.
Last year one of the hospital respondents made the statement that is was wise to "invite them (community representatives) to dinner but not into the kitchen." This year an administrator commenting on the need to educate the community about the circumstances of the conversion stated, "This is the decision, these are the reasons - we're not asking for permission." Such comments do not appear to reflect a defensive posture on the part of hospital administrators, but rather convey an attempt to maintain a balance between civic awareness and market realities.
Several administrators pointed to the important role of community outreach and involvement for post-conversion success (e.g., it is critical in terms of marketing the services that a hospital hopes to provide). One respondent noted that while community outreach requires a lot of work, it can be very important for building market share.

(2) Conversion Support for Success

Conversion to a CAH, while definable in discrete events and activities, is very much an evolving process. In order to navigate successfully through a maze of negotiations, agreements, transitions and re-organization, a number of efforts must be in play simultaneously. Tracking and evaluating the cumulative impact of these multiple efforts requires a significant investment of time, energy and resources. Anything that contributes to a smoother and more open process facilitates oversight and coordination, as well as achievement of a successful outcome. Three recommendations for achieving a smoother and more open process include:

Management teams should include individuals with strong financial skills.
Work with the Medicare Fiscal Intermediary early in the process.
Keep physicians and other staff informed.

(a) Management Teams Must Have Financial Skills
The process of conversion can be extremely complex in that its success depends upon very close attention to detail. Given the many financial implications of the conversion, the more that management "understands the ins and outs of cost-based reimbursement, the better they can make it work for their hospital." It also helps if the chief executive officer (CEO) has strong financial skills to develop services and manage costs. As one respondent indicated, "CAHs have to manage their numbers and not be managed by the numbers." It is the CEO who usually represents the hospital's strategy before the board, the community, and other interested parties. Another respondent supporting this position noted that "without good management, CAH conversion is not going to save a hospital."
Some of the administrators noted that management styles with demonstrated success in the private sector can be adapted to hospital operations to improve their efforts to monitor, plan and evaluate operations (particularly in terms of forecasting and assessing of potential operational strategies). For example, it was mentioned that hospital managers are increasingly called upon to support initiatives that have economic implications for the community (e.g., as a condition of business relocation to the area, business might demand 24-hour emergency room coverage by board certified/eligible physicians). Situations like this will become ever more important as a hospital's status depends upon retaining good favor in the community in order to maintain local subsidies and credits. To improve their chances of survival, managers must be able to balance these opportunities to forge stronger links with their community.
(b) Work with the Medicare Fiscal Intermediary Early
The need to work closely with the Medicare Fiscal Intermediary (FI) continues to be a major suggestion from administrators who have converted to CAH status. Last year it was noted that a common problem for converted hospitals was the length of time between designation and the receipt of CAH-based reimbursement from Medicare. This continues to be an issue, albeit one that diminishes as the number of states and CAHs participating in the program increases and learning curves level out. The most important reason given for working with the FI early was the same this year: to "avoid a lag in payments and ensure that an appropriate interim rate is established."
(c) Keep Physicians and Other Staff Informed
The majority of the administrators site visited this year stressed the importance of "doing one's homework" and getting medical staff support early in the process. While some favored education and information over involvement in the process, it is unclear whether this reflects their desire to retain authority over the process, or merely a recognition of the time and energy constraints of their medical staff. Respondents were clear about the need to make sure that the board, medical staff, and nursing staff understood the reasons for conversion and the implications of taking such action. While a few cautioned that one should not oversell the issue, most were clear that a common understanding needed to be established not only to answer questions but to facilitate the open dialogue so necessary for successful conversion. As discussed in Chapter 3H, the vast majority of physicians affiliated with CAHs are supportive of the hospital's decision to convert.

(3) Conversion Trip Points

Last year three lessons were identified that were considered potential trip points for the conversion process: being confident in the financial feasibility study, focusing on the human as well as the organizational aspects of conversion, and questioning future funding promises and projections when making a conversion decision. This year's lessons share some overlap with those identified last year.

Question your feasibility studies, particularly if conditions change.
Be aware of the organizational culture prior to conversion.

(a) Question Your Feasibility Study
A large number of respondents pointed out the importance of trusting the figures from financial feasibility studies. Clearly, these studies are critical to the conversion decision, and the more the management team understands the financial aspects of conversion, the greater the chance of making appropriate decisions. However, several respondents noted that it is important to remain aware of changes that can emerge after the analyses are completed. If this happens, several respondents pointed out the need to challenge the study before moving too far along in the process.
It is equally important to "look at the potential changes in hospital operations and decide if you are willing to change and if it is going to be worth it." The importance of being able to forecast the implications of organizational re-engineering can be vital. Given that more than two-fifths of the surveyed CAHs used internal personnel to perform their feasibility assessment, these tips take on particular relevance. Unless a hospital's situation is very straightforward, it is advisable to find someone with experience using cost report data to examine the feasibility of operational changes, and to assess the implications of conversion for external as well as internal operational relationships. It is also advisable to review all contracts and operations for possible savings as well as implications for changes following conversion.
(b) Be Aware of the Organizational Culture Prior to Conversion
It is easy to view conversion activities as mostly technical processes: crunching the numbers, gathering opinions, making decisions, and acting accordingly. However, as noted in last year's report, it is important to remain aware of the subtle human element in the process and the potential for interpretations and attributions that can alter the context surrounding decisions to convert. For example, in one facility an existing management contract covering the hospital CEO and the director of nursing (DON) complicated conversion efforts because it increased the suspicion among staff that the change was being forced from the outside rather than internally. At another site, a historically high turnover rate among administrative staff led to a power vacuum filled by nursing staff. As the conversion proceeded and the nursing staff were not involved to the degree they considered appropriate, significant issues arose requiring negotiation before the process could successfully continue.

Chapter 3B: Scopes of Services in Critical Access Hospitals

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Last modified: 05/07/08